Take charge of wealth
The rules of building wealth
and assets do not change, we need to remind ourselves of them from time to time
Some things about investing
sim ply don't change. However, peo ple need to be reminded of them all the
same. A new year is a good time to reflect on these principles. So here goes.
First, when we save, we pay
ourselves.Wealth is what we keep, not what we earn or spend. Most evaluate
their status in society in terms of what they earn and what they own or what
they can pay for.Sadly , they only reflect spending habits.What we earn can be
distributed three ways to the goods and service providers (spending), to others
that may need help (charity), and to ourselves (savings). Let's decide how the
pie splits.
Second, if we work hard to
earn money, our investments should also work hard for us. We do not devote
enough time to decide how we will make our investments work. At the start of
the year, there should be a plan about how money will be invested through the
year, and devoting half a day to figure that out is time extremely well spent.
Otherwise, money would rot in bank accounts or get squandered into products
pushed by sellers.
Third, everyone needs an
asset manager. When you buy gold or property , you decide that you are the
asset manager, and that these assets are good choices.
Gold simply sits around
doing nothing except being the buffer to fall back on in a crisis; and property
earns a low single digit rental yield for most who refuse to sell what they
have bought. In the marketplace, there are others who are building assets that
need your savings. Governments, businesses, institutions and entrepreneurs are
willing to offer returns for using your money . When you buy a mutual fund, you
appoint an asset manager for a fee to buy these assets for you. If you like to
earn money and allow professionals to buy your investment assets, consider
mutual funds.
Fourth, diversification is
the only free lunch. There is no telling which is the best asset. Personal
goals and needs are different; ability to take risks is different; and
performance of different assets can vary significantly . To hold a diversified
portfolio is the surest way to participate in sensible asset building without being
unrealistic about choosing only the best.
What looks good today can
turn sour tomorrow. A diversified portfolio relieves an investor of the need to
take these calls.
Fifth, the only insurance
you need is for your life. Your earnings come from your profession and there is
the risk of staking so much on the human asset as the source of primary income
in a household. If you have dependents and if you like to provide for them, you
need assets that will replace you should your income cease to come in. Building
adequate assets that will take care of this need can take a lifetime of
earning, saving and investing. Until then, life insurance fills that shortfall
in personal assets. Buy a pure term plan before investing.
Sixth, if you are not
investing in equity , you are not doing enough. The proportion may vary or the
product choices might be different, but investing in equity is the only route
to building sizeable wealth. You can start your own business and build enough
value to make you a billionaire. But for those who can't do it, investing in
other successful businesses is a good way of building wealth. Settling for
smaller returns on your provident fund, recurring deposit and government saving
schemes is a needless compromise in building wealth when diversified equity
funds can be bought with great ease. Seventh, you need not save every rupee you
require in future, if you gave your investment the time to grow in value. As
you set money aside and keep investing, it grows in value, compounding with
time. The thought of having Rs 1 crore for your child's higher education in 15
years, can make you worried. But you can achieve that goal by saving Rs 2.5
lakh a year, at 14% compounded return over that 15-year time frame. What is
important to note is that you would have actually put aside less than 40% of
that Rs 1 crore; the balance 60% comes from the appreciation in the value of
your investment over that time. Without equity you cannot hope to get anything
close to that 14% compounded return. Save and invest aggressively .
Why are these lessons
important, even at the cost of sounding repetitive? Statistics show that a very
small percentage of investors actually hold diversified equity portfolios built
with regular contribution from their incomes over long periods of time. The
majority does everything else.
They continue to hold gold
and real estate; they invest in low-return yielding government schemes; they
leave idle money in banks; and they hold multiple insurance policies to save
taxes and earn returns that do not cover inflation. But most earners and savers
continue to aspire for the good life; some hope to turn entrepreneurs; and some
dream of early retirement. This mismatch between aspiration and action is not a
problem that the government can fix. Take charge of your wealth and your
assets.
|
UMA SHASHIKANT
|
The author is Chairperson,
Centre for Investment Education and Learning
TOI11JAN16
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